The Reason So Many People Are Unemployed

Around the time of the Great Depression, a man named John Maynard Keynes made an incredible discovery. The reason so many people were out of work was not really because of irresponsible banks or high taxes or reckless government policy. It was really much simpler than all that: there wasn’t enough money.

Now, as individuals, we’d all like a little more money for ourselves. But pause for a moment and think about what it means if there isn’t enough money in the economy as a whole. A good way to wrap your head around this is to think about a much smaller case: instead of the whole economy, let’s think about a now-famous babysitting co-op on Capitol Hill. Instead of dollars, the co-op used its own scrip that was worth an hour of babysitting time. When you wanted to go out, you’d pay a couple hours to someone else to watch your kids; then when they wanted to go out, they’d pay you or someone else to do the same for them.

It all worked great for a while, until one day they found they had too few pieces of scrip. Every couple had only a couple hours left and, having so little, they didn’t want to waste it. So they all decided to save it for a very special occasion. This was kind of an incredible situation — even though there were people who wanted someone to babysit their kids, and people who were willing to do just that, the deal didn’t happen, simply because the co-op hadn’t printed enough colored pieces of paper. Eventually the co-op learned their mistake, printed some more scrip and handed it out, and everybody went back to babysitting like before and were much happier for it.

The same thing happens in the real economy. When there aren’t enough green-colored pieces of paper around, everybody gets worried and holds on to the little they have. Even if you’d like someone to build an extension on your house, and there’s someone else out there who’d like to build an extension on your house, the deal doesn’t happen, just because you don’t have enough green pieces of paper (or, more realistically, dollars in your bank account). This is a total waste. You don’t get the extension and the other guy doesn’t get a job, all because we haven’t run the printing presses enough (or added enough zeroes to the bank’s computers).

Before the Great Depression, most countries wouldn’t simply print more colored pieces of paper. They were on the “gold standard” and they would only print more currency when more gold was discovered. This led to the most bizarre series of booms and busts as more gold was discovered in strange places and then “used up” by population growth or other things. After Keynes, countries eventually stopped this silliness and just started printing their money directly. As soon as they abandoned the gold standard, they begun recovering from the Great Depression.

But the power to print more money is obviously a very special power and you wouldn’t want it to fall into the wrong hands. So, in the United States, we’ve taken it away from elected politicians and given it (mostly) to the big banks. The banks select people to run their local Federal Reserve and then some of those people (along with some additional folks nominated by the President) are selected to be members of a group called the Federal Open Market Committee (FOMC). The FOMC, essentially, decides how much money there should be in circulation, which in turn decides how many people have jobs.

You might think this sounds crazy — a bunch of unelected bankers get to decide how many people have jobs? — and, in fact, it is crazy. But I’m not making it up. Ask a macroeconomist, like Paul Krugman, and this is exactly what he’ll tell you. And if you look in the Federal Reserve Act or on the Fed’s website, you’ll find their mission is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” These multiple goals are relatively recent; before 1978, the goal was simply “maximum employment, production, and purchasing power.”

Now some people will claim that the Federal Reserve has done all it can to create more jobs but the recession is so deep this time that there’s nothing else it can do. But that’s just not true — even the chairman of the Federal Reserve, Ben Bernanke, says it’s not true. He was asked about this in a Senate hearing. As the Economistsummarized his response: “Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”

Which brings us to the subject of inflation. Obviously if you print a lot of new money, it makes existing money worth a little less. This is annoying, but is it worse than having people out of work? Well, it depends who you are. If you have a lot of money, you’re more worried about it becoming worth less. But if you work for a living, you’re more worried about people being out of work. As you might expect, Mr. Bernanke has a lot of money, as do the other bankers on the committee and the people who selected them. So they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less.

The biggest reason this is possible is because nobody realizes it. If it was conventional wisdom that a bunch of unelected bankers looking out for rich people were the reason everyone was out of work, politicians would be forced to explain to angry voters why we had this crazy system and might actually consider doing something about it. But, incredibly, it just seems like nobody has any idea. Voters don’t realize it, politicians don’t understand it, journalists don’t cover it. And, in fact, they’re so far from having any idea that it’s really difficult to explain it to them. When you say a bunch of unelected bankers are the reason there are no jobs, they just look at you like you’re crazy. I’ve just spent a page or two explaining it and you still probably think I’m crazy. But it’s true! This isn’t some Ron Paul-type crackpot idea; this is mainstream economics, from Paul Krugman to the head of George W. Bush’s Council of Economic Advisors.

I feel a bit like the guy in one of those movies, going around and telling everyone that the murderer is standing right over there — right there, look! — but nobody believes him and people continue to die. It’s incredibly frustrating, and I have no idea what to do about it.

One final point: How did we get into this mess in the first place? Why did we suddenly find ourselves without enough money? Well, there was a housing bubble: for many years, house prices kept going up and up for no other reason than everyone was betting that they were just going to keep going up. When house prices were unsustainably high, that was part of the money in circulation. But when the music stopped and the bubble popped, house prices cratered and nearly $8 trillion disappeared overnight. The government has printed a bunch of money since then, but nowhere near the $8 trillion we lost. Obviously a lot of other bad stuff happened during the financial crisis, but this is the reason everybody is out of work.

Comments

Aaron

You have a lot of valid points, I do agree with 90% of them ;)
What you are describing are the inflation reasons, but there is more to the current economy situation, and running out of greens is just a result of more deep issues and ongoing crime.
Let me give you some of the reasons:
1) Few banks like Golden Sachs and AIG played poker with huge amount of cash, those amount are of significant %% (~10%) of the total dollar cash mass
2) At the same time the market that holds the whole US economy, the real estate market, collapses on unpaid mortgages - it’s not a secret that US economy is real estate market bound (not technology or goods import/export) and recent bubble proved it
3) Golden Sachs is constantly borrowing money from governemt via non-fee bailout cash and “rents” that cash back to Feds via government bonds, skimming the APR, thus Feds are running out of cash because GS is accumulating extra cash without returning it to the market - they cannot stop GS because there is nothing illegal with that arbitrage, it’s more of the moral issue; that’s why Obama is desperately trying to push special provisions thru the Senate to stop such abuse, but Senate is so corrupted, they fight it back
4) Feds start to print money to keep positive cash flow which creates the situation you describe
5) Golden Sach makes $404b out of taxpayers pockets in 2 years by skimming the Feds - you and me payed bonuses to those jerks out of our and our children pockets

The babysitting coop you are describing sounds like a zero-sum economy, but is it really? What is to stop the price from going down, so that some folks would be willing to accept a fraction of a scrip? What is to stop new couples from joining the coop, driving up the supply of babysitters, and therefore driving down the cost? If everyone is so low on scrip, that implies that a small group is hoarding it. What is to stop some of the babysitters from increasing the quality of their service until the hoarders are finally tempted to spend their scrip back into circulation?

And back to the real economy, what is to stop all of these unemployed people from learning new skills, moving to other markets, or working for lower wages? Why should savers be punished because the unemployed are unwilling to make sacrifices?

I can go into the details of the babysitting coop if you want, but I don’t think it’s particularly informative about the more general case. In the real economy, imagine the unemployed work for less measured in dollars (a lower nominal wage). Then their employers reduce the price of the products those workers make, since labor is a large component of the costs (a lower nominal price). But that means that the new lower wage workers receive is actually worth about the same in terms of what it can purchase (same real wage). So we’re right back where we started!

I don’t see how learning new skills or moving to other markets is supposed to help in this situation.

It’s helpful to look at civilizations as products of ‘social energy’… countless decisions by individuals and groups. (A decision is an idea + an action).

Money and credit are very imperfect technologies for the storage and allocation of this ‘social energy’ with an inherent bias in favor of any with the power to create it.

So, since this ‘creator’ bias is inevitable the solution has to lie in democratizing (with important checks and balances) the process. This inherent bias also makes the Fed’s claim of independence ridiculous on its face and is a core problem with the monopoly of central banking. (This doesn’t suggest its elimination, only elimination of its monopoly).

After all… who has the right to create and than allocate YOUR ’social energy’ without your input?

That’s worse than taxation without representation… that’s potentially multi-generational enslavement without having an ounce of input into that allocation of your life’s energy.

The thought process that rationalizes it for the ‘credit creator’ and those most closely benefitting is tied to a problem of scaling biological altruism but that’s a separate essay.

I believe this inherent bias may suggest that more than one type of credit creation may be desirable. For example local currencies geared to local products and services to function alongside one or more global currencies… in an attempt to overcome a ‘proximity’ bias which goes along with a social bias.

This approach can encourage asset-based-community-development and economic and financial resiliency while preserving the advantages of global trade and markets as well.

Again, I’m not an economist but it seems to me these are ideas worth investigating.

A brief post on some of this here:

On Social Energy, Enterprise & Expanding the Technology of Money
http://culturalengineer.blogspot.com/2010/01/on-social-energy-enterprise-expanding.html

I also believe the Individually-controlled / Commons-dedicated Account facilitating the microtransaction in Commons focussed activities (politics and charity) is an essential piece of this puzzle.

Opinion and influence are also aspects of ’social energy’ which money powerfully conveys(though we might wish it weren’t so). Current money technology inhibits the free flow and networking of this energy which distorts opinion markets.

Um, this is a little oversimplified i think ;). For example, “Obviously a lot of other bad stuff happened during the financial crisis, but this is the reason everybody is out of work.” Everybody’s out of work? ;)

I don’t think the Fed’s choice can be described as simply as “they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less.”

The truth is that increased inflation means that everyone has a bit less - not just the big bankers, but everyone saving up for a car, or a house, or a wedding. It means that everyone’s wage goes a little less; hopefully it still covers food, but it covers less of their discretionary spending desires. Bankers and people with wealth keep ahead of inflation. “regular people” have a much harder time.

Fluctuations in inflation cause so much uncertainty at home and in business that it leads to less spending overall. Bernake thinks that reducing that risk will lead to a stronger and more sustainable recovery than simply pumping money into the economy.

Thank you, this is definitely an important part of the story, and it is crazy that it is not recognized- but there’s a reason for that, and it has to do with the part of dynamic that you don’t pursue. Inflation is really bad for people who have a lot of money, and that matters a great deal. Organizations at the core of the financial system are engaged in an active, dynamic, complicated trust relationship around the flow of very large quantities of money over specific periods of time.

Large organizations don’t actually have little pieces of green paper sitting around- instead they utilize a web of promises to exchange various quantities of green paper with each other on various timeframes and at various costs.

Now, the other bad thing that happened a couple of years ago was the near-collapse of these trust relationships, in part related to the housing crisis but still largely independent of it. The failure of Lehman and the breaking of the buck nearly led, on several occasions, to the web of trust underlying the financial system from failing altogether. If that had happened, we would be talking about 50% unemployment and martial law, rather than 10% unemployment.

What’s happening now is that well-intentioned money managers are still “rebuilding trust.” The problem that raising inflation creates in a climate where trust is not guaranteed is one of complexity, of too many things changing at a time. If money manager attention has to focus on minimizing inflation losses, then we’re still facing a near term risk of a frozen financial system.

This dynamic is the really important one, from a progressive governance perspective, to work on explaining and fixing.

So are you actually advocating increasing the money supply as the solution to our current economic problems? If so, by how much? And how should it be distributed?

I’m not sure I’m convinced that your babysitting co-op example mirrors our actual economic situation. It may be fine to say that some unemployment can be caused by a lack of money, but it doesn’t necessarily follow that all unemployment can be traced back to that same cause.

In the current environment, it’s hard not to put at least some of the blame on automation, outsourcing, and overall improvements in efficiency that allow fewer people to do more work. If a factory can get the same levels of output without hiring as many line workers, it won’t hire the line workers, won’t hire the managers of those line workers, and won’t staff the hr department that would have dealt with all the people it’s not hiring elsewhere, etc. Yes, some of those lost jobs are offset by the upstream companies that supply the automation tools, but those upstream companies are improving their own efficiencies at the same time. And it’s not only manufacturing that’s seeing these kinds of changes: the internet is allowing all kinds of work be distributed more efficiently, as well (ask local papers how Craigslist has helped them).

People knocked out of these kinds of jobs don’t necessarily have the skills that are currently in demand. It takes time and effort to figure out what those in-demand skills actually are, to retrain so that you have them, and to go out and get a job. During that time, they don’t spend, because they don’t have the money to.

There were plenty of people who benefited greatly from these increased efficiencies, and many of them still have plenty of money. Are they spending? Some of this goes back to your babysitting coop example, that they aren’t because they want to hold on to what they perceive as an increasingly rare thing. But that’s not the whole story. There are two kinds of spending: the kind you want to do (trips to Spain, gold watches, etc.), and the kind you don’t (the dentist, taxes). Where do you think ‘employees you don’t really need’ falls? And it’s not like you need to be a greedy bastard to make this decision (how many people does Craigslist employ?).

If you’re increasing the money supply, are you handing it over to the people who already have money, in hopes they’ll go on a hiring spree? If so, why are you convinced that they actually will? Are you handing it out directly to the people who don’t have jobs? If so, how do you know that will translate into a sustainable solution, where they’ll end up with jobs on the other side?

Increasing the money supply isn’t without danger. If you’re wrong, and you add too much, money loses its value, and prices go up. This hurts the poor and people with cash savings far more than it hurts the wealthy, who don’t care how much a gallon of milk costs and regularly convert cash to other holdings anyways. It also directly rewards people who have racked up debt (and while this might help some ‘good’ people, don’t forget that debt is also a favored tool of the same wealthy bankers you’re calling out in your post). Too much inflation is bad, and it’s incorrect to assume that it’s only the wealthy who suffer the ill effects of it.

While Joe Hewitt hit on most of the topics I was concerned about, I just wanted to add some other ones:
1. There is no fractional scrip, no way to accept .5 hours for an hour (or more) of babysitting. This makes it difficult to deflate.
2. This is not really a closed economy; people can just hire a regular babysitter. This may all have been caused by people with saved scrip EXITING the economy and using $$$ paid babysitters outside of the system. Note: gradual inflation DOES effectively reduce the impact of disappearing hoarders, but that is a paper by Greenspan, not necessarily Keynes.
3. Not long after the end of your quoted graph, everybody effectively returned to a “gold standard”, or something meant to emulate it, via the Bretton Woods agreement -> http://en.wikipedia.org/wiki/Bretton_Woods_system , And correlation doesn’t mean causation. If the gold standard was so bad, why did it work for the USA (with a fixed $35/oz price of gold) for 30 years after the end of the depression? Only the expenses of the Vietnam war pushed the USA into sufficient deficit spending that they needed to hit the printing presses, and a brief examination of the 70’s near hyperinflation shows a compelling counter-example of the utility of the gold standard.

The uninformed people I know like to occasionally forward html emails around to eachother. Usually, these emails involve humor, or holiday greetings, but sometimes they stretch a little and try to inform.

If you want to do something, I suggest you continue writing informative blog posts like this one, but also create some compelling and informative graphics that could be easily forwarded around. I can barely get my friends/relatives to click a link, let alone actually read something. But if I send them a graphic in an email, along with a short blurb, they’ll look at it and read the blurb before deleting.

I believe some of the money that was “in the economy” wasn’t actually there. You talk about increasing the flow of currency in the economic system, and you mention the housing investment bubble, but I believe that’s apples and oranges. The bubble happened when housing investments were valued higher than their worth, and the crash happened when they were valued at their actual worth again (or less). The notion that these investments could be sold for more than they were worth was an illusion that there was more money in the system, just solidified in these properties and portfolios.

The only money that went “missing” in the crash of 2008 was the value of junk bonds/loans/portfolios — money that wasn’t in the economy before the bubble anyways. A more interesting question is: “Where was the REAL money circulating when this potential-but-not-real money kept changing hands as the investment bubble inflated?”

What substantiative actions are being taken by the reserve? To me it appears they are gunning for inflation with the low rates.

If I have $billions then I can invest my money in a way that hedges against inflation. Conversely if I make $20k/year I can’t insist that my employer pay me in long oil positions. So it’s not true that inflation always hurts the bourgeoisie and helps the proletariat.

It is true that inflation hurts a lender and helps a debtor. If inflation is at 10% and your mortgage at 6% then you’re effectively making a 4% return on debt. Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren’t lending

As for Bernanke/cronies motivations; the federal government would like inflation to be as high as possible without risking collapse. So if “money for their masters” was the Fed’s goal they will keep gunning for sustainable inflation. Bernanke/cronies can hedge against it, and the largest debtor in the world would prefer to pay a low interest rate.

Bankers are America’s Nazis. Like the Nazis, they believe their own self-righteous rhetoric that results in catastrophic loss of life and property. Also, bankers take a hard-line, fundamentalist view of Darwinism (when it suits them) and believe they are doing God’s work.

I’m being overly dogmatic here, but it’s not so far-fetched. All of the Nazi propagandists went to work in America after the war. It’s no surprise that the corporate media landscape in postwar America turned out to be very similar to what Hitler inflicted on the Germans to get them to buy into the system.

The problem is so big, and the citizenry are so propagandized, out-of-shape, and unable to cope with the current realities that I’m not sure what can be done. Maybe we should just all accept that were going to live this quasi-serf-like existence for the next few generations.

As far as I can tell, America is the next Argentina at this point. The Democrat-Republicans are content with using currency inflation to benefit only the speculators and politico class at this point.

The educated class in America feel that they have to repeat the approved slogans so they too might become part of the aristocracy. We live our lives as if it were a television advertisement of our self-importance so that we might be able to give a TED talk one day.

The working class seem content with distracting themselves by overeating toxic food-like substances from BigAgra and watching mindless celebrity-drivel to be concerned with anything that would enable their long-term happiness or survival.

Going back to subsistence typing now unless you’ve got a better idea on what we should do.

Ron Paul’s ideas on economics aren’t strictly his ideas, but those of Friedrich von Hayek, to which Paul so often credits. Hayek won the Nobel Prize in 1974 and according to Wikipedia “is considered by some to be one of the most important economists and political philosophers of the twentieth century.” While Wikipedia and the Nobel committee aren’t necessarily the final word on the subject, or anything else for that matter, describing Hayek’s ideas as crackpot, is not only ad hominem, but uninformed. You’d be well served reading Hayek’s The Road to Serfdom before falling too in love with Keynes and his ideas.

One of the reasons why the Federal Reserve’s principal missions is to fight inflation is that the American economy was so badly managed during the 1970s. Prices skyrocketed, in part because dollars were being printed to pay for the Vietnam war and other social programs introduced in the late 1960s.

While classical economics states that “inflation is the debtor’s friend,” inflation has a detrimental effect on everybody (unless you have a negative net worth). One can argue that inflation disproportionately affects the lower middle class and the elderly. A millionaire can easily absorb losing 10% of his net worth to inflation; a poor person, not so much. This is why the economic choices made in the ’70s resulted in a protracted period of political upheaval.

If the current tight money supply were to be translated into voter anger against sitting politicians, as it did in the Nixon/Ford/Carter era, the Fed would change its priorities. But since the Fed governors and chairmen are appointed, it would take years for this to happen.

I’d just read that the Dodd banking reform bill proposes to have Fed governors appointed by the President instead of nominated by member banks. That makes a lot of sense to me.

Cash handouts to the public by the Australian government during the crisis have been seen as one of the reasons we stayed out of recession. Couldn’t your government perform similar actions to ‘circumvent’ the collusion by the Federal Reserve and the big banks? If that is true, and has not been done, then the government is just as much to blame as the rest of the system.

Hi Aaron, your theory makes a lot of sense to me, but I’m having trouble grasping the final part (about how we got into this mess).

I live in the UK where, by all accounts, the recession hasn’t caused unemployment to the same levels it has in the states (at least, not yet), but everyone’s saying it’s still a massive problem, and to be sure, a lot of people are losing their jobs.

However, property prices, which were higher than prices in the US before the recession, have not really taken much of a hit. Maybe a little, but they are still unsustainably high (I’m 24, I earn relatively very well, and I have no real prospect of affording the deposit on a mortgage in the near future).

So why are we in just as much trouble as you guys? I appreciate our economy is reliant on yours to a larger degree than is probably healthy, but what exactly is the reason that the rest of the world is in recession because of a US property crash?

Now, you might say that this is the opposite position. You want the Federal Reserve to print more money. While Ron Paul thinks it has printed too much money and caused inflation.

But the positions have in common that the actions of the Federal Reserve should be transparent and accessible to the public, not locked up in private discussions. Only then can there be legitimate debate about monetary policy.

Is the argument that there are literally not enough 0’s in people’s bank accounts (a psychological expectation), or that this number of 0’s does not buy enough stuff? If the latter, then it’s related to inflation, so if there were more inflation, then people would be inclined to save even more.

It’s not as clear an argument as you present it. The economy is complex. Every recession is different from the others.

I went to Capitol Hill and worked hard to get Rep. Paul’s audit the fed amendment passed in the House — and we succeeded, it passed the full House for the first time since he started pushing for it decades ago despite incredibly intense opposition from the Fed and House leaders.

But yes, Rep. Paul and I have opposite ideas about what the Fed should do. Saving is the problem. If there was more inflation, people would save less because the money they saved would be worth less in the future.

But then why slam Ron Paul by associating him with “crackpot” ideas? He has been the lawmaker whose concrete actions would lead to increasing awareness of the problem you are so frustrated by!

The disagreement is an honest one. And there is no doubt that Ron Paul has been fighting this fight for decades, honestly, without a lot of political gain, as you point out.

So please cut him some slack and don’t insult him carelessly. I think you are probably being overly sensitive to fellow “liberals” who feel “libertarians” are naive, and are trying to distance yourself from that group. These simplifying labels don’t help.

Also, I am curious to hear your opinion on whether it’s literally the number of 0’s or whether it’s buying power that causes people to save (I’m sure a mix of both).

I’m not really convinced by your argument. So it’s hardly fair for you to feel that everyone else is just ignorant of the issue you raise. They might just disagree with you.

For people looking for more sources, Naked Capitalism has a guest post today about unusually massive amounts of excess reserves that the Fed is holding on to, and there’s a lot of analysis too. Concurs on the facts and most of the analysis in your article, Aaron, as far as I can see:

Aaron said, “Savers should be punished because saving is bad for the economy.”

It’s thinking like this that got us into the mess to begin with. Fueling asset purchases with massive debt left us with overvalued assets, debts that cannot be serviced, insolvent banks, and trillions in transfers from workers to Wall Street.

If I choose to work more today and save the surplus so I can work less when I’m 70, that’s called being responsible. If you punish responsibility by inflating away the value of individual’s savings, you’ll get less of it.

Saving allows you to wait until there is an opportunity to spend your money on something that you actually want. The alternative is waste. Imagine the degenerate case where all of the wealth that you create is destroyed unless you immediately trade it for something else. Insanity.

I’m sorry Aaron, but your idea that saving is bad for the economy is so unbelievably dumb that it takes a lot away from some of your other points (note that I’m saying the idea is dumb, not you, so this is not ad hominem.) I certainly agree that the Federal Reserve and it’s associated rich bankers are a bunch of slime balls. But to say that we need more inflation to solve our problems is just silly (inflation by definition is more money in a closed system.) As other’s have said in previous comments, inflation mainly hurts the poor and middle class.

Now, let’s talk more about saving. If people do not save, then there is no CAPITAL which can be used by businesses to create things and otherwise improve the economy. If you just create money out of thin air, it has no value. Money is supposed to represent stored labor, which is why it is so evil when the bankers just inflate it at their whim.

As others have said, if saving is so bad for an economy, why does China basically own the US at this point? The Chinese are diligent savers, and as a result China has bought trillions in US Treasury Bonds. In fact if China did not buy our bonds the US government would collapse overnight. This is because the US government is so gigantic and money hungry that it cannot tax we citizens enough to survive. It depends on loans from people outside the country buying bonds.

Lastly, your babysitting example is so cherry-picked to prove your point that is it useless as a general example. I can use the same example to prove the harm of inflation: if some people in the coop started counte-fitting the scrips (aka inflating them), they would be able to get more baby-sitting than they should. In addition the extra scrips then circulating would reduce the value of each scrip, and therefore hurt the people who were saving some for when they needed them.

By the way I assume you live hand to mouth since you so abhor saving. I hope you don’t ever lose your job then because if you do you will be screwed. Or more likely the rest of us will have to support you. If you feel that is “fair” then I’m not sure what to tell you.

It’s called a proletariat, a word ironically out of use since the proportion of the populance falling into that category has only grown and grown since the romans coined it. There’s really nothing useful for most people to do.

This post is an amazingly lucid explanation of things I’ve seen obfuscated many other places. The whole argument is very clear and very well laid out.

I wasn’t familiar with the babysitting coop, had to read the Wikipedia entry. Dumb question here: would the fluctuations in scrip value and the hoarding have been less of a problem if providers could announce how much babysitting they were willing to do, effectively issuing scrip themselves? Since scrip will always ultimately be redeemed by providers, should they be the issuing authority?

The idea that saving is bad: I think you’ve made a compelling point that taking currency out of circulation is bad. But if I “save” it in a bank, and they then use it for business and personal loans, it continues to circulate. Have I missed something here?

So there’s a second point here that I didn’t go into. The idea that money saved in a bank gets loaned out again is actually a kind of myth. In practice, a bank makes loans whether or not they have the money — they’re licensed to create new money by the Federal Reserve whenever they see an investment opportunity. (This is very surprising to people, but it turns out to be true.) Thus putting your money in the bank effectively takes it out of circulation as much as putting it under your bed does.

Think of it this way. The 1930s in the U.S. were marked by Deflation. And the 1970s in the U.S. were marked by Inflation. The gold standard is a complete distraction from the issue.

I’ve written about this extensively, so i’ll add a few other components to the political mess. For starters, and I write this on my blog…a great deal of the Ron Paul stuff comes from the guy giving him economic advice in his 08 campaign: Peter Schiff. Schiff is currently running for Senate as a long shot in Connecticut. He is also the one who began beating the inflation drum like we’re in the 70s. I think this is completely wrong. I tend to side with the Deflationary minority on this particular issue—though I am on the small d democratic end of the spectrum politically and in terms of what I think of other people (i.e. I believe in the citizenry—unlike the opposition who wants to subordinate them to business hierarchy).

But here is the thing. The Fed doesn’t really “print” the money. They have a complex way of controlling lending. But it all revolves around the banking system. The best general way to understand it is to know the post 70s story with the fed.

Until 1979 (pre Reagan) the fed had to answer to congress much more. If the fed wanted to raise rates (reduce investment capital coming in the downward direction from the top of society towards the working class), it had to clear it with the congress. What happened was that in the 70s, you had this inflationary problem, and no house rep wanted to be the person to pull the trigger and raise rates and thus kill jobs in their districts. To get around this, by the late 70s, the new right had pretty much consolidated power (During the Carter administration) and there was an agreement to extend power of the fed so that it could be “independent” of politics. This would mean that it could raise rates to rates high enough to slow the economy down, and bring down the inflation. There are so many layers to this story, but that’s the quickest I can type it out.

But just understand, that entire thing is ideological. It is built around the following assumptions:

1 the economy must revolve primarily around private investment.

Reality: the economy does not know the difference between public sector spending and private sector spending. The merits of each should be discussed—but the economy does not have a preference. At the end of the day it’s a social decision as to which outcomes we prefer… not a political determination sent down from the heavens.

Point 2: Since point 1 is held as gospel, then we must do all we can to ensure that the aristocracy on top is feeling like investing. If we create a climate where they don’t want to invest—then we must all suffer. That’s the rule, as it is laid out in rule 1.

Reality: We COULD simply stimulate from the middle, creating state jobs, state money to super small business, food subsidies paid for by progressive taxation, direct competition for employment (forces the private sector to bid higher for workers), etc..

point 3. The techniques we must rely on for investor class happiness are tax cuts or low taxes for the investors (so they’ll invest of course) and the fed’s focus on inflation.

But as of right now, just survey the situation. The fed has ultra low rates..yet you still have no inflation anywhere in sight. They are pulling out all of the stops to maintain the investors aristocracy, but it isn’t working. The S&P is up 70% or so from the 2009 lows, but look at the rest of the economy.

In my estimation, it doesn’t matter what they do to encourage the investor elite to invest their capital. The problem in the economy is not in the abstract. The problem is WHICH PEOPLE are negatively effected. Poor people are excellent for investment (they are willing to work more for less, giving up more in life, for less in return. They are reducers of standards). This is why the economy will not be fixed by monetary policy or investor oriented fixes. You can’t fix that area because it isn’t the part that’s fucked up.

Only those who havn't lost their jobs (yet) believe that the unemployed should work for lower wages. These people can't understand the overwhelming stress brought on by job loss because they havn't experienced it.
They don't realize that the unemployed population already are accepting a smaller income. That's because unemployment benefits are a fraction of what people were making while working. It sounds pretty unrealistic to tell someone who was bringing home $50,000 a year to apply for a job at McDonalds, and still pay mortgage, car, health insurance, utilities, food, college loans, etc. All debt that was manageable with a decent income becomes overwhelming because the debt to income ratio has drastically changed.
What should the unemployed do to compensate for this, foreclose on their homes, have their cars repossessed, lose health insurance, have their children drop out of school?